bond proceeds must be allocated to

CWSRF purposes and 35 percent must be

allocated to DWSRF purposes.

cross-collateralization structure.

Second, a state may also achieve

proportionality by requiring that loan

repayments on loans made from the

CWSRF are pledged, as the primary

security, only to the CWSRF bonds (or

portion of a joint bond issue) and loan

repayments on loans made from the

DWSRF are pledged, as the primary

security, only to the DWSRF bonds (or

portion of a joint bond issue). For

example, if $50 million in bonds are

issued for CWSRF project loans and $25

million in bonds are issued for DWSRF

project loans, then $50 million of

repayments must be pledged as security

from CWSRF project loans and $25 million

in repayments must be pledged as

security for DWSRF project loans. The

second option may not be used if the

state provides principal forgiveness

subsidies for disadvantaged communities

funded with bond proceeds from the

DWSRF program because the DWSRF

security would be disproportionate to the

security provided by the CWSRF program.

ross-collateralization provides

additional security to bondholders,

thereby improving the bond ratings and

reducing the cost of borrowing to the

CWSRF/DWSRF programs. New Jersey’s

DWSRF program is now able to benefit

from the CWSRF programs Aaa/AAA/AAA

ratings, reserves and security structure.

This update describes the New Jersey

C

Cross-collateralization between the

Clean Water State Revolving Fund

(CWSRF) and Drinking Water State

Revolving Fund (DWSRF) programs was

authorized by the Departments of

Veteran Affairs and Housing and Urban

Development, and Independent

Agencies Appropriations Act, 1999

(Public Law 105-276). The act allows

funds from one SRF program to be used

to secure the other SRF program against

default. For states that leverage their

SRF programs, the DWSRF will benefit

from existing CWSRF credit quality,

diversification and coverage levels. To

date, New Jersey is the only program to

both receive approval for a crosscollateralization structure and issue

bonds with the structure in effect.

nder a cross-collateralization

structure, states may combine

assets of the CWSRF and DWSRF

programs as security for bond issues

". . . provided that revenues from the

bonds are allocated . . . in the same

portion as the funds are used as security

for the bonds . . . .” (Public Law 105-

276). EPA has released two examples

that illustrate how proportionality may

be maintained in the draft

Transfer/Cross-Collateralization Policy.

irst, a state can achieve

proportionality at the debt service

reserve level. For example, if the debt

service reserve is the primary security

and 65 percent of the funds in the

reserve are CWSRF funds and 35 percent

are DWSRF funds, then 65 percent of the

U

F

STATE ACTIVITY SRF UPDATE

To date, New Jersey

is the only

program to receive

approval for a

cross-collateralization

structure and issue

bonds with the

structure in effect
T

E

he New Jersey Environmental

Infrastructure Trust manages

the financial functions of both the

CWSRF and DWSRF programs. The

Trust has focused on making

programmatic improvements that

build on the principle of pooling

loan financings to strengthen the

rating of its bonds beyond that of

the individual credit ratings of

borrowers. In 1998 New Jersey

jointly issued $56.6 million in bonds

to leverage both the CWSRF and the

DWSRF.

xhibit 1 displays the flow of

funds for New Jersey’s crosscollateralization of the Clean Water

and Drinking Water Financing

Program.

SRF

Program Trustee account. This

account acts as another level of

security to cover defaults in debt

service payments on other bonds

issued from 1995 to the present.

Funds can be held by the Master

Program Trustee for up to one year.

Once the funds are released, the

New Jersey Department of

Environmental Protection separates

the Clean Water and Drinking Water

repayments and earnings and

recycles them back into the

appropriate fund for any authorized

purpose of the CWSRF/ DWSRF.

Overview of New Jersey’s Cross-Collateralization Structure

Aborrower receives half of its

financing in the form of an

interest bearing loan from the Trust

Bond Fund, which is financed with

revenue bond proceeds. The second

half of a borrower’s financing is in

the form of a zero interest loan from

the State CWSRF or DWSRF Fund that

is financed by capitalization grants,

state match funds and loan

repayments. The borrowers make

repayments through a bank, which

acts as the Loan Servicer that directs

the repayments to first cover debt

service payments on Trust Revenue

Bonds, then directs the remaining

portion of the payment to the Master

Exhibit 1

New Jersey Cross-collateralization

Clean Water & Drinking Water Financing Program

State CWSRF

Fund

State DWSRF

Fund

Loan Servicer

Trustee

1995-1997

Trustees

Local DW

Borrower

Local CW

Borrower

1989-1997

Prior Loan

Servicers after

repayment of

prior Trust Bond

Debt

Master

Program

Trustee

NJDEP

Revenue Bond

Holders

SRF Tust Bond Fund

50% of Project Cost 50% of Project Cost

50% of Project Cost 50% of Project Cost

Reserve Fund

Each CWSRF/DWSRF

project loan is funded

with 50% revenue

bond proceeds and

50% interest free

equity funds.


Fitch IBCA reports

that annual cash

flow coverage

ranges between a

ratio of 1.5 and 3.2

STATE ACTIVITY

UPDATE

Levels of Security for New Jersey’s Cross-Collateralization Program

both the Trust and SRF loan to the Loan

Servicer Bank which immediately

transfers funds required for repayments

to bondholders (Exhibit 2). The second

level of security is created when the Loan

Servicer transfers all the remaining funds

to a Master Program Trustee. The Master

Program Trustee holds these funds for up

to one year, during which they are made

available to make up any deficiency in

bonds issued 1995 and after. The debt

service coverage associated with this

security is also very strong, rangingbetween a ratio of 3 and 6 times annual

debt service. The final level of security is

the debt service reserve fund which is

capitalized at the lesser of: 125 percent

of average annual debt service, the

maximum annual debt service or 10

percent of bond proceeds.

Exhibit 2

Security Structure of New Jersey’s

Cross-collateralization Program

Repayments of loans made from both Trust

Revenue Bond proceeds and SRF Equity

(capitalization, etc.)

Available loan repayments of loans made

from previous bond issues

Debt Service Reserve Fund is the lesser of:

125% of Average Annual Debt Service,

Maximum Annual Debt Service or

10% of Bond Proceeds

1st Level

2nd Level

3rd Level

Repayments of loans made from both Trust

Revenue Bond proceeds and SRF Equity

(capitalization, etc.)



N

N

ew Jersey uses cash-flow leveraging in

its program. The program structure

provides outstanding level of debt service

coverage for the Program’s revenue bonds.

Fitch IBCA reports that annual cash flow

coverage ranges between a ratio of 1.5 and

3.2. The leverage structure is designed to

maintain proportionality for crosscollateralization by pledging loan

repayments as the first level of security for

bonds in the same proportion reflected in

the joint DWSRF and CWSRF bond issue.

ew Jersey funds projects with one-half

Trust revenue bond proceeds and

one-half SRF capitalization funds. The

Trust and NJDEP devised a three-tiered

system for the repayment of its bonds.

The primary level calls for repayment of
New Jersey’s structure is designed to

be appealing to bond rating agencies

and investors. The State’s approach

enhances the security structure of New

Jersey’s combined CWSRF and DWSRF

bonds while complying with federal

CWSRF and DWSRF program requirements.

The following are key features of New

Jersey’s cross-collateralization structure:

The Attorney General’s certification

will document the State’s authority

to cross-collateralize the SRF

program

The debt service for the DWSRF and

CWSRF will be accounted for

separately

Repayments on CWSRF program

loans will be paid to the CWSRF

Separate records and financial

statements are kept for each

program











 Repayments on DWSRF program

loans will be paid to the DWSRF

Because New Jersey is pledging

repayments in order to meet the

proportionality requirements for

cross-collateralization, NJDEP will

not implement the SDWA 1452(d)

disadvantaged community

“principle forgiveness” provision

SRF

STATE ACTIVITY

UPDATE

Summary of Key Features









Interest earnings within the Debt

Service Reserve Fund will be

distributed to the appropriate

borrower

A borrower is only eligible to draw

on their allocable share of the Debt

Service Reserve Fund

Both DWSRF and CWSRF programs

will maintain a 50/50 relationship

between Fund and Trust Loans

tates interested in further information

on cross-collateralization should

contact their EPA Regional Office SRF

Coordinator. For information on the New

Jersey program contact the state

representative below.

Dirk Hofman

New Jersey Environmental

Infrastructure Trust

P.O. Box 440

Trenton, NJ 08625

Tel: (609) 219-8600

This update was prepared by

EPA Headquarters

S

State Contact: